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Q:

Would I lose too much by starting two years later on a new 401k?

I have about $4,000 in my 401(k) plan, and I have about $3,000 in credit card debt. I am leaving my job to start with another company and I am faced with the choice of rolling my 401(k) over into my new company's plan or taking the penalty and closing it out to pay off my credit cards, then starting over with my new employer's plan. I am 28 and single. I know that the advice is to first get out of debt, then build up an accessible savings of two months' living expenses or so, then start saving for retirement. Would it be in my best interests to close out the 401(k) to pay off my debt, build up a safety net in savings, and then start contributing to the new 401(k)? Or would I lose too much by starting two years later? -April

April,

You definitely will lose too much by starting two years later. My suggestion is to not cash in your 401(k) plan. There are far too many negatives and not enough positives in cashing your 401(k).

The first negative is you will have to pay income tax plus a 10 percent penalty, or a minimum of at least 20 percent in federal income tax on any early withdrawal. Hopefully, none of your credit card debt has an interest rate that high. The second negative is the chances are overwhelming you will not replace the $4,000 that you withdraw. The third is you would be starting later than you should in funding your retirement account. Instead of having to rebuild your 401(k) plan, concentrate on paying off your credit card debt. If the interest rate on your credit cards is around 18 percent, by paying $110 per month, you can be out of debt in about three years or $90 per month will get you out of debt in about four years.

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